Posts Tagged ‘stock market’
“There was so much more going on than any one person could know, reality was so much bigger than the self, that it was alarming to contemplate”*…
Henry Oliver on The Panic of 1825 and the ways in which it modeled crises to come and shaped the modern world…
… the Panic of 1825… wasn’t like panics of the past. There was no external cause of this bubble — no war, no weather, no pandemic. It was not a speculative mania. It took place in many fragmented investments — loans, insurance policies — made by individuals, often in good faith, in the new economic system. At the end of the Napoleonic Wars, Britain had introduced a new gold standard. To avoid a sudden stop in loans and note issues (after running the war on cheap money) the Bank designed a transition. First, they hoarded gold like Smaug, to keep prices high and prevent a run. Second, they brought out new low-yield stocks. Third, the government issued new bonds and started a big infrastructure programme. With all the extra money in the system, backed by gold, people started investing, post-war prosperity flourished, and George IV could yap complacently about the success of the economy. Now that gold payments resumed, the market for precious metals boomed. Hence all those investments in South American gold mines. That all sent capital overseas, and so the currency was becoming, in reality, a paper system. Letters and warnings were published in The Times, but all in vain. And so when the bank drew in its horns, the crash was inevitable.
This wasn’t, then, a rampant speculative bubble. It was a diversification crisis. So many people invested in so many different things and none of them knew enough about the rest. Many investments were sound. Many participants were not speculators. “The fundamental problem in the market,” as one scholar has written, “was not that investors were over-extending themselves but rather that they did not have enough information to appreciate how over-extended everyone else already was.” After the crash, the finance system started to be centralised, to avoid such situations in the future.
1825 is known as the first modern financial crisis. No single group could be blamed for what happened. It was a systemic event. It demonstrated, quite firmly, that there is no place or person at the centre of things, no-one who runs the market. 1825 was, in some senses, the year the modern economy started. But it wasn’t just in economics that 1825 changed the world. Politics and literature were reinvigorated too…
More (including the role of Disraeli) at “1825: the first modern financial crisis,” from @HenryEOliver.
[Image above: source]
* Kim Stanley Robinson, The Ministry for the Future
###
As we ponder precedent, we might recall that it was on this date in 1867 that the first stock ticker was introduced.
The advent of the ticker ultimately revolutionized the stock market by making up-to-the-minute prices available to investors around the country. Prior to this development, information from the New York Stock Exchange, which has been around since 1792, traveled by mail or messenger.
The ticker was the brainchild of Edward Calahan, who configured a telegraph machine to print stock quotes on streams of paper tape (the same paper tape later used in ticker-tape parades). The ticker, which caught on quickly with investors, got its name from the sound its type wheel made.
History
Calahan’s ticker (source)
“Horse sense is the thing a horse has which keeps it from betting on people”*…
Still, people do an awful lot of betting. Legal sports betting currently runs at almost $77 Billion per year in the U.S. and is growing by double digits; last year, 40 percent of people aged 18 to 44 gambled online (sports and casino wagering combined), nearly double the 21 percent of those aged 45 to 54. Illegal gambling (for understandable reasons, harder to gauge) is estimated at (at least) $1.7 Trillion globally, and also on the rise (in part because it’s such a handy way to launder money).
As football season gets underway, Jeopardy! champ (and gambler) James Holzhauer considers the ways in which a sports wagerer is like a stock market investor…
The sports betting marketplace has many parallels to the world of finance: both are essentially populated with speculators trying to make money by outsmarting everyone else. Some sportsbook conglomerates have even been run by people with experience on Wall Street. But how do the two compare side by side? Let’s look at some key similarities and differences between the two modes of investing…
Diversification, insider trading, derivatives, inflation concerns: “How sports betting and the stock market compare,” from @James_Holzhauer in @TheAthletic.
(Image above: source)
* W.C. Fields
###
As we punt, we might recall that it was on this date in 1930 that Al “Scarface” Capone enlisted former rivals into partnership to form a giant co-operative organization to control the beer/spirits, vice, and gambling “industries” in Chicago. The Syndicate, as it was known, was headed by Capone and run by a cabinet, with each member controlling different areas of the business: alcohol sales, alcohol running, gambling, vice, and war on those outside the Syndicate.
The following year, Capone was charged with tax evasion; in 1932 he was convicted and sentenced to the Federal Penitentiary in Atlanta; in 1934 he was transferred to Alcatraz.
“Don’t look for the needle in the haystack. Just buy the haystack”*…
Over the course of 2020, Elon Musk’s wealth skyrocketed from $27.7 billion to $147 billion. Musk even overtook Bill Gates, to become the second richest person in the world. This was a tremendous jump in fortune: Musk was only at 36th place in January 2020. Musk’s enrichment was mainly due to Tesla’s rising stock price (TSLA:US), which surged from $86 in January to $650 in December. Tesla is currently one of the ten most valuable companies in the US stock market.
In an already record-breaking year, Tesla’s largest and most rapid increase in valuation came in November, due to its announced inclusion into the S&P 500 index, now scheduled for 21 December 2020. Within a week of this announcement, Tesla’s share price rose by 33%, as passive funds now have to invest more than $70 billion. This was a remarkable boost for stock of a company that many analysts say is already obviously overvalued.
Just a few weeks earlier, on 21 September 2020, Yinghang ‘James’ Yang was arrested for insider trading by the Securities and Exchange Commission (SEC). Yang was an employee at S&P Dow Jones Indices (S&P DJI), sitting on an index committee that decided about which companies were to be included and excluded from S&P DJI indices. Yang had used this insider knowledge, to trade options on these companies through a friend’s account, making almost $1 million in the process. The case is currently being investigated by US authorities.
While these seem like unrelated incidents, both these episodes in index committee decision making are part of a tectonic shift that has fundamentally transformed capital markets globally. That is, the move towards passive index investing — and the concomitantly growing power of index providers...
A wonderfully-clear exploration of the history of index funds and consideration of their implications: “It’s the index, stupid! Our New Not-So-Neutral Financial Market Arbiters.”
* John C. Bogle, founder of the Vanguard Group and creator of the index fund
###
As we watch the watchmen, we might recall that it was on this date in 1773 that a group of colonists known as the Sons of Liberty, disguised as Mohawk Indians, boarded three British tea ships and dumped 342 chests of tea (worth $18,000– over half a million dollars in today’s currency) into Boston harbor. The provocation was the Tea Act of May 10, 1773, which allowed the British East India company to sell tea from China in American colonies without paying taxes apart from those imposed by the Townshend Acts— which American Patriots strongly opposed as a violation of their rights. Colonists objected to the Tea Act because they believed that it violated their rights as Englishmen to “no taxation without representation.”
The Boston Tea Party was, of course, a triggering event in the gestation of the American Revolution. Parliament responded in 1774 with the Intolerable Acts, which, among other provisions, ended local self-government in Massachusetts and closed Boston’s commerce. Colonists up and down the Thirteen Colonies in turn replied with additional acts of protest, and by convening the First Continental Congress, which petitioned the British monarch for repeal of the acts– and probably more impactfully, coordinated colonial resistance to them. The crisis escalated, and the American Revolutionary War began near Boston in 1775.
“I’m forever blowing bubbles / Pretty bubbles in the air”*…
Last Wednesday, Hertz, which has filed for bankruptcy, suspended it’s plans to sell lots of new shares. The backstory is fascinating… and sadly, all-too-indicative of our times…
Ok, so. Up until this year, I would’ve told you that there are two general kinds of financial bubbles.
The first kind of bubble is where everyone believes the future will be like the present. Think credit bubbles and real estate; think 2007-2008, where the fundamental belief that drove the bubble forward and into ruin was “We’ve figured this out. We can’t lose. The risk has all been worked out. Lever up, cowboy. We will never die.”…
The second kind of bubble is where everyone believes the future will be different from the present. Think equity bubbles, startups, and crypto; think 1999, where the fundamental belief that drove the bubble forward and into ruin was “It’s a new economy. All the rules are different. The upside is unlimited. If you get in now, you’ll be rich. We’re going to live forever.”…
I was wrong. There is a third kind of bubble, it’s happening spectacularly right now, and we’re going to see it a lot more in the future.
If the first kind of bubble is “everyone thinks the future will be the same”, and the second kind is “everyone thinks the future will be different”, the third kind is “everyone thinks the future doesn’t matter.”…
I’m sure most of you have heard of the Wallstreetbets subreddit by now; if you haven’t, the best way I know how to explain it is that it’s like “multiplayer Jackass for the stock market.”
Wallstreetbets started as a bunch of random internet yahoos bragging about crazy YOLO trades they’d make (and would actually follow through on!), and what enormous percentages of their net worth they’d win or lose spectacularly. I really do think that Jackass is a good comparison here. Yes, these people are trying to get rich; but more importantly, they’re trying to provoke reactions. It’s a game of who can be the most shocking. There’s really not much difference between reading some of these WSB posts and watching an old Jackass sketch. You’ll laugh until you can’t breathe, and then keep laughing when you realize someone actually got kicked in the crotch that hard.
But as it got more popular, some actually sophisticated (and supremely aggressive) traders are getting in on the fun, and it got highly competitive and weird. It’s the newest version of “the stock market as full-contact sports with legal gambling”, and it’s a lot of fun. No one here cares about valuation or fundamentals. It is explicitly a casino. Everyone is here to get in and out of a position in the most shocking way possible. And, astoundingly, there’s enough AUM getting accumulated behind these bets that it can actually start to move individual stocks in weird ways.
The groundwork for this strange show has been built up over a few years, but when the pandemic hit, all hell broke loose. A perfect storm of events come together: first, generational volatility in the stock market as everyone tried to get in front of (and then out from) a global pandemic; second, everyone getting quarantined at home and desperate to feel something, and third: no sports.
Enter Hertz. Hertz was in trouble anyway; it’s carrying around a ton of debt to pay for a fleet of cars that no one wants to drive, because we have Uber now. When the pandemic hit, they got called on their debt, couldn’t make it work, so they had to declare bankruptcy and start a restructuring process.
But then weird things started to happen. Hertz’s stock, which is presumably worthless, starts to go up. And up. And up. It gets bid up a whole 500% over a 3-day period last week. What is going on?
There’s no way to describe it other than, this is a Jackass sketch taking place. It started out as these internet YOLO traders playing an increasingly stupid game of chicken. But then it… caught on? Other people started to get in on this too. Hey, obviously the stock in the long run is worth zero. Everyone knows that. But it’s going up, and tomorrow it might go up more. If this were just some dumb penny stock with a cool story attached to it, that’d be old news. This is different.
When you see a stock getting bid up like this, the only conclusion you can draw is “The future does not matter, because in between now and then, this is explicitly just spinning a roulette wheel. The stock could go up or down, who knows, but at least you know it has nothing to do with the underlying value of the stock (which we all know is zero!), and everything to do with other gamblers.
So Hertz sees this happening, and they’re like, well, if there’s demand for our stock, we should go sell some! I mean, it’s a ridiculous kind of demand, and it’s not “real” demand, but hey, maybe it’s real enough. So Hertz files, and is granted, an emergency request to their bankruptcy judge to issue a billion dollars worth of new stock in order to take advantage of whatever this is. Tom Lauria, one of the attorneys representing Hertz, had an all-timer line: “New platforms for day traders may be facilitating this. There are forces at work that us non-financial people, that we can only observe.” The SEC, presumably between gasps of laughter, declined to weigh in on whether the transaction was legal, saying “it is up to the company to comply with securities law.”
Just to restate how funny this is: Hertz is granted permission, by their own bankruptcy judge, to sell stock in their company which has already declared bankruptcy, because due to weird mojo in the universe, there’s a small army of reddit trolls playing chicken with each other and it just might save the company. Financial Twitter goes crazy, and (of course!) people start bidding up stocks of other bankrupt companies. It was a great day to be online…
Eminently worth reading in full– the ever-illuminating Alex Danco on the emergence of a new kind of financial bubble: “Never Hertz to Ask.”
See also “Speculative Booms” in Jamie Catherwood’s “The State of the Market” (and then, here); plus “Hertz share issue: demolition derby” and “Trading Sportsbooks for Brokerages, Bored Bettors Wager on Stocks.”
And experts suggest that there’s going to be more–lots more– scope for creativity: “A Tidal Wave of Bankruptcies Is Coming.”
* Popular American song; music by John Kellette; lyrics credited to “Jaan Kenbrovin” — actually a collective pseudonym for the writers James Kendis, James Brockman and Nat Vincent, combining the first three letters of each lyricist’s last name. The number was debuted in the Broadway musical The Passing Show of 1918
###
As we pucker up, we might recall that it was on this date in 1970 that Penn Central, a century-old American railroad company, declared Section 77 bankruptcy, the largest ever U.S. corporate bankruptcy up to that date. They did not use the occasion to issue stock, and did later exit bankruptcy, and were ultimately folded into Conrail, the U.S. government’s railroad holding company.
“Who owns the future? This is the question at the heart of every stock market.”*…
In November of last year, I opened a brokerage account. I had been reading simple, bullet-pointed introductions to financial literacy for a few months before that, manuals “for dummies” of the sort that I am conditioned to hold in contempt when their subject is, say, Latin, or the Protestant Reformation…
It was driven home to me repeatedly in my early efforts to build an investment strategy that, quite apart from the question of whether the quest for wealth is sinful in the sense understood by the painters of vanitas scenes, it is most certainly and irredeemably unethical. All of the relatively low-risk index funds that are the bedrock of a sound investment portfolio are spread across so many different kinds of companies that one could not possibly keep track of all the ways each of them violates the rights and sanctity of its employees, of its customers, of the environment. And even if you are investing in individual companies (while maintaining healthy risk-buffering diversification, etc.), you must accept that the only way for you as a shareholder to get ahead is for those companies to continue to grow, even when the limits of whatever good they might do for the world, assuming they were doing good for the world to begin with, have been surpassed. That is just how capitalism works: an unceasing imperative for growth beyond any natural necessity, leading to the desolation of the earth and the exhaustion of its resources. I am a part of that now, too. I always was, to some extent, with every purchase I made, every light switch I flipped. But to become an active investor is to make it official, to solemnify the contract, as if in blood…
Justin E. H. Smith (@jehsmith) wrestles with taking stock of one’s soul: “On the Market.”
###
As we ponder the long and short of it all, we might recall that today is National Pig Day.
You must be logged in to post a comment.